CR Land to Benefit From China Real Estate Recovery

After pushing some revenue to 2023 from 2022 and raising working capital needs slightly, our fair value estimate for China Resources Land 01109, or CR Land, is marginally lowered to HKD 43 from HKD 44. We continue to like CR Land at this share price level and see the developer as a key beneficiary of a recovery in China’s real estate market, especially given its strong financial position and access to prime landbank. CR Land hasn’t released its February contracted sales data yet, but we expect a continuation of the positive trend in its precontracted sales, which were up 5% year on year in value terms in January 2023. This marks a return to growth that is in line with the broader industry, part of which is due to the low base in 2022, but also as the lifting of lockdowns is allowing visitors to property launch showrooms, which we think will boost sales.

We believe the China real estate market has troughed in 2022 and a recovery through 2024 is expected. In terms of revenue and profit, CR Land is expected to have weathered the downturn better, due in part to stable rental and property management income, and higher average selling prices offsetting lower sales volume. We are looking at 2022 revenue to be flat. During the interim results, the company guided for its property development operating margin to remain at least 23%, but noted that the industry will by cycling through higher-cost landbank projects. We are slightly more cautious and keep our property development margin assumption at 20%. On a group level, however, we expect the operating margin to hover around 23% through 2024, with rental income to improve. As such, we see a 13.7% decline in 2022 earnings and a 17.5% rebound in 2023 as inventory is sold. So far, we also observe peers like China Overseas Land & Investment, or COLI, and developers with well-located projects in Tier 1 and Tier 2 cities, getting some buffer from higher average selling prices offsetting a lower volume in unit sales.